When Rudolph W. Giuliani was appointed U.S. attorney for the Southern District of New York in the spring of 1983, the case, which had been slowly simmering over a relatively small flame for a year, suddenly became a raging wildfire. Giuliani pressed his subordinates to prosecute cases more quickly; happy to see himself in the role of an anti-Mafia crusader willing to take on Wall Street and white-collar criminals, he did not doubt in the least that he was born for a greater purpose. “Aggressive” was the label that was most often used to describe Giuliani. His tactics, as the former mayor of New York David Dinkins once said, were “dangerously close” to a “philosophy that the ends justify the means.”12 Ed Williams’s biographer described the prosecutor and later mayor of New York City as “zealous and politically ambitious.”13 According to Leonard Garment, the former special counsel to President Richard Nixon and former U.S. delegate to the United Nations who began to represent Marc Rich in 1985, Giuliani quickly realized that he had a “blockbuster case” on his hands.14
The result was a calamitous breakdown in communications between the government and Rich’s lawyers. The situation was worsened by the fact that Rich’s then legal team had attempted all sorts of dubious maneuvers in order to have the case deferred. Sandy Weinberg still has trouble understanding Rich’s behavior. “It was just stupid,” he tells me, shaking his head. “It was self-destructive. He underestimated us. He played games with the documents. He made the case ten times bigger than it ever would have been. If he had stayed here and addressed it, it would have been manageable. He would have done some jail time, you know, but it would have been manageable.”
The spark in the powder keg was a dispute over business documents belonging to Rich’s companies. After the Southern District had begun its examination of the case, it convened a grand jury that soon began subpoenaing millions of documents from Marc Rich International, Marc Rich + Co. AG, and oil companies and resellers in the United States that had done business with Rich. Marc Rich International—a Swiss subsidiary with a branch office in New York that paid taxes in the United States—complied with the subpoenas. However, Marc Rich + Co. AG, as a Swiss company operating in Switzerland under Swiss law, refused to obey the order. The company argued that Swiss secrecy law prohibited the company from producing documents without the express permission of the Swiss government.15
Draconian Fine
Nevertheless, District Judge Leonard Sand denied Rich’s lawyers’ motion to dismiss the subpoenas and ordered Marc Rich + Co. AG to produce the documents located at the company’s headquarters in Zug. When the company continued to refuse, Judge Sand ordered a draconian contempt fine of 50,000 per day until the documents were delivered. The fine was applied beginning in late June 1983, even though the Swiss government protested the decision with unusual vigor as an unacceptable violation of Swiss sovereignty.
Rich refused to pay the fine. He secretly sold Marc Rich International to Alec Hackel, his close friend and one of the founders of the company, who then ran the company under the name Clarendon Ltd. in Zug. Judge Sand labeled the sale a “ploy to frustrate the implementation of the court’s order” and threatened to freeze up to 55 million of Marc Rich + Co. AG’s assets in twenty American and European banks and other companies that owed Rich’s company money.16
Rich’s business was soon suffering under Judge Sand’s record contempt fine and the drastic threat to freeze the company’s accounts. Several business partners and banks pressured Rich to find a solution to the problem. Faced with increasing difficulties in obtaining credit, Rich’s lawyers began to negotiate a resolution. On August 5, 1983, lawyers for both sides met in Judge Sand’s Manhattan apartment and discussed the case until late into the night. They finally reached a deal just before midnight: Rich agreed to pay the New York court 1.35 million toward the accumulated fine, to produce the court-ordered documents in Switzerland, and to pay off the remaining fines at a future date. The agreement appeared to smooth all the ruffled feathers, and it seemed as if the case would finally take on a semblance of normality.
Four days later, however, on August 9, 1983, Weinberg received a telephone call. “A guy said, ‘This is Deep Throat,’ no kidding,” Weinberg recounts. “He called out of Milgrim, Thomajan & Lee, Marc Rich’s law firm, and warned us that subpoenaed documents were being shipped out of the United States on a Swissair flight. He even called back to give us the correct flight number, SR 111 to Geneva and Zurich.” Weinberg could not believe his ears. He cursed so loudly that his colleagues came into his office to see what was wrong. After he cooled down, he immediately sent a few agents to John F. Kennedy International Airport.
At 7:00 P.M. the Swissair Boeing 747 was already on the runway and ready for takeoff; the police were able to stop the plane only minutes before its departure. Thanks to the tip-off from Rich’s own law firm, agents recovered two steamer trunks full of business documents. Shortly afterward, the media-savvy Giuliani had the trunks brought to Judge Sand’s courtroom as physical evidence of Rich’s brazen behavior and immediately held a press conference to publicize the seizure. The episode was soon referred to as the “steamer trunk affair.” “By this time Marc Rich had lost all credibility; he was down the toilet. After that affair he was viewed as a scoundrel,” says Weinberg, who felt that Rich’s actions strengthened the prosecution’s hand. “It prejudiced him in court and in the public opinion. When people obstruct justice and try to interfere with your investigation, that indicates that you’re right.” Rich’s lawyers maintained they were only shipping the papers to Switzerland to let them be viewed by an attorney in order to make sure they contained no confidential information. As a result of the incident, a furious Judge Sand ordered that all of Rich’s companies produce the subpoenaed documents by the following Friday. “By Friday?” Rich’s flabbergasted attorney asked. “We have forty-eight offices worldwide.” “By Friday!” Judge Sand ordered.
Caught in the Crossfire
August of 1983 was one of the hottest that Switzerland had ever seen. It seemed even hotter in Rich’s headquarters in Zug. A dozen people sorted through the documents they needed to send to the United States in a jet that Rich had chartered especially for the purpose. “We worked day and night,” one of them told me, “fourteen, fifteen hours per day.” Four of the five founding partners were present—Marc Rich, Pinky Green, Alec Hackel, and John Trafford—as well as two lawyers and a handful of young employees. Within three days the group handed over two hundred thousand documents to officials in the United States, and that was just the beginning.
Then, on August 13, officers from the Office of the Attorney General of Switzerland knocked on the door of Marc Rich + Co. AG in Zug. They had come to seize any remaining documents that had been subpoenaed by the U.S. government. They cited article 273 of the Swiss Penal Code, which deals with the disclosure of information to foreign countries and economic espionage. The Swiss government wrote a letter to the State Department and the district court stating that it was “legally and physically impossible for Marc Rich + Co AG to provide the U.S. Attorney with any single document located in Switzerland.”17 Now Rich not only had the government of the United States to worry about; the Swiss government was after him as well. “He was caught in the crossfire,” remembers one of the participants, who is still in the commodities business.
The Swiss government’s actions did nothing to dampen Judge Sand’s resolve. He continued to demand all of the subpoenaed documents and ruled that the contempt fine of 50,000 per day should continue. For the next year one of Marc Rich’s messengers would deliver a check for 200,000 to the federal courthouse each Friday and a check for 150,000 each Monday—all in all, more than 21 million. The Swiss repeated their protest in an official note describing the “violation of generally recognized principles of international law. The imposition by a foreign authority of acts aimed at having effects on Swiss territory violates the sovereignty of Switzerland and is therefore unacceptable.”18
Rich, who one year earlier had been one o
f the great unknowns of the international oil trade, was now recognized by over half of the entire world—a fact that certainly seemed to boost the reputations of Rudy Giuliani and Sandy Weinberg. The American and international media reported regularly on the Rich affair and its international implications, and thus made the two prosecutors national celebrities.
Giuliani, who pushed his attorneys to produce indictments, had a few more aces up his sleeve. In mid-September 1983 he invited journalists to a press conference the likes of which they had never before seen. In Giuliani’s view, this press conference was a historic event.
“The Largest Tax Evasion Indictment Ever”
Journalists called to the law library on the eighth floor of the U.S. attorney’s office, where Rudolph W. Giuliani was waiting on Monday, September 19, 1983, witnessed a rarity: a prosecutor reading aloud from a bill of indictment. When Giuliani began performing United States of America v. Marc Rich, Pincus Green, et. al., he evoked an atmosphere of Chicago in the old days. Fifty-one counts of fraud, racketeering, tax evasion, and other charges were contained in the indictment.19
It was “the largest tax evasion indictment ever,” Giuliani said.20 He continued to read from the indictment. “The defendants engaged in this scheme as a part of a pattern of racketeering activity in which they concealed in excess of 100 million in taxable income of the defendant Marc Rich International, most of which income was illegally generated through the defendants’ violations of federal energy laws and regulations. This scheme, and pattern of racketeering activity, enabled the defendant Marc Rich International to evade in excess of 48 million in United States taxes for the 1980 and 1981 tax years.”21
Giuliani, however, held back the most serious charge until the end of the press conference. It was a charge that would follow Rich for the rest of his life. “On November 4, 1979, Iranian nationals invaded the U.S. Embassy in Teheran, Iran. Thereafter, 53 American citizens were held hostage for over 14 months until their release on January 19, 1981.” Despite the trade embargo and further regulations that President Jimmy Carter imposed after the hostage-taking incident, the indictment stated, Marc Rich + Co. AG “entered into contracts with the National Iranian Oil Company (NIOC) to purchase Iranian crude and fuel oil.” Marc Rich and Pincus Green had personally “negotiated from the offices of Marc Rich International in New York . . . the sale of approximately 6,250,000 barrels of Iranian crude oil for approximately 202,806,291.00.”22
Trading with the enemy—the gravest of accusations. Congressman Chris Shays (R–Connecticut) summarized the public mood toward Marc Rich and Pincus Green, “saying they were two traitors to their country and our country.”23 Sandy Weinberg told me it was an accidental discovery, as they had only come across the dealings with Iran in the course of the investigation. “These Iranian transactions were outrageous,” he told me.
The Oil Price Control
To fully understand the criminal case against Rich, we must begin with a highly simplified explanation of the extraordinary complex federal price control regulations that governed the sale of crude oil in the United States after the first oil crisis in 1973. As we’ve seen, the Arab oil embargo of October 1973 that followed in the aftermath of the Yom Kippur War unleashed an oil shock throughout the United States. President Richard Nixon signed the Emergency Petroleum Allocation Act only a few weeks after the embargo had gone into effect.24
From November 1973 to February 1981, the United States regulated the price of American crude oil to encourage domestic production. Different prices were allowed for three categories of oil. These three types of oil were chemically indistinguishable but were categorized on the basis of their source. Crude oil from a well operating at or below its 1972 production levels was known as “old oil,” the cheapest of the three. Then came “new oil,” which included oil discovered after 1973 or oil obtained from existing wells in excess of 1972 production levels. The most expensive category of oil was known as “stripper oil,” oil obtained by squeezing the last drops of oil from wells that were nearly exhausted and whose average daily production was less than ten barrels.
Only American stripper oil could be sold openly for whatever price the world market would bear—a price that far exceeded the regulated prices for old and new oil. In 1980 a barrel of stripper oil could generally be sold for over 20 more than a barrel of old oil and 15 more than a barrel of new oil.25 These regulations had no effect on the price of oil in other parts of the world.
This Byzantine pricing system was in fact a regulatory nightmare that completely flouted free-market principles. Different regulations applied to different types of oil producers, oil refiners, and resellers, as well as to oil produced from different types of wells according to the amount of oil these wells had produced in the past. It was a political farce that distorted the international and domestic crude oil markets. President Ronald Reagan abolished the act by executive order on his first day in office in January 1981.
Although the regulations were complicated, the reality in the market was even more so. The system of price controls only applied to the first sale of regulated oil in the United States. Upon subsequent sales of the same oil, further regulations limited an increase in price by restricting the amount of profit that a reseller was allowed to make by trading in or speculating on crude oil. This “permissible average markup” (PAM) was calculated by the Department of Energy based on a given company’s past profit margins. Newer companies with little or no trading history, such as Marc Rich International, were not allocated a PAM until September 1980. Beginning on September 1, 1980—only months before Reagan abolished the act and paved the way for deregulation—these resellers were permitted a fixed maximum profit of twenty cents per barrel.
It was against this backdrop of regulation and price controls that Rich sought to run his business and turn a profit. Where others saw only obstacles and difficulties, Rich saw business opportunities. He attempted to use the regulations to his advantage and earn the maximum possible return. The oil markets adapted to the regulations very quickly, while dealers tried to avoid the price caps wherever possible. One way of doing this was by combining a deal involving price-controlled domestic oil with a deal involving nonregulated foreign oil. Companies began to swap oil from different categories in order to allow one party to obtain unregulated oil that could be sold at the full market price. Discounts and additional advantages were made available for this purpose. For these types of deals, U.S. companies needed an experienced international reseller with good contacts in the global market. Marc Rich was the perfect candidate. In 1979 and 1980 he was the international oil trader. No one else had better business relations with partners in the Middle East, Africa, and Europe. His two companies—Marc Rich International (MRI), with a branch office in New York, and Marc Rich + Co. AG in Switzerland—were perfectly positioned to profit from this trade.
John Troland, co-owner of West Texas Marketing, was aware of this fact, and in the fall of 1979 he suggested a deal to Rich. According to Troland, WTM could legally “tier trade” regulated oil obtained at the lower regulated prices for uncontrolled domestic oil that could then be sold at the unregulated free market price. However, WTM had difficulty obtaining regulated oil. Many producers were willing to sell their regulated oil at the controlled price only in combination with an additional transaction that they themselves would benefit from. These transactions involved unregulated foreign oil sold at a discounted price. WTM, Troland explained, did not have the necessary access to the foreign oil market to engage in this additional transaction. Troland knew that Rich had the knowledge, the connections, and the capacity to trade in the global oil market.
In a typical example of this process, Marc Rich + Co. made discounted offshore sales of unregulated foreign oil to Charter Crude Oil Company, an American oil producer from Texas. Charter then agreed to sell cheap price-controlled domestic oil to MRI that MRI would then resell to WTM. WTM swapped this cheap oil for higher-value unregulated oil and sold it back to MRI at a dis
count. MRI subsequently sold the oil at market prices on the global market. After the transaction was completed, MRI compensated Marc Rich + Co. for the discount it had given to Charter in order to obtain the regulated oil. Without this discount, Charter would never have been able to sell cheap domestic oil.
This form of transaction continued after the twenty-cent permissible average markup was imposed on MRI in September 1980, but the transactions were restructured to greatly reduce MRI’s role. MRI no longer acquired the tier-traded domestic oil at a discount and no longer reimbursed Marc Rich + Co. for its losses on the offshore trades at the beginning of the transactions. Instead, WTM and another reseller, Listo Petroleum, sold the tier-traded domestic oil at the higher unregulated price and paid Marc Rich + Co. for its contribution to the entire transaction. The U.S. oil producers involved in these restructured transactions were Charter and Atlantic Richfield—the longtime trading partner of Marc Rich International.
The purpose of these complicated transactions was always the same. One of the traders in the chain gained access to unregulated oil that could later be sold for the highest price that could be obtained on the global market. In return the business partners involved in these linked transactions were compensated for their costs and troubles.
The King of Oil: The Secret Lives of Marc Rich Page 13